When discussing financing strategies, the benefits and costs of using debt should be of primary concern. The most important benefit from including debt in a firm's capital structure stems from the fact that firms can deduct interest payments for tax purposes but cannot deduct dividend payments. This makes it less costly to distribute cash to security holders through interest payments than through dividends.

The total dollar amount of interest paid each year and, therefore, the amount that will be deducted from the firm's taxable income is:

D k_Debt

This will result in a reduction in taxes paid (the interest tax shield) of

D k_Debt t

where t is the firm's marginal tax rate that applies to the interest expense deduction.

What are some other benefits of using debt and why are these effective?